A letter alerting Federal Deposit Insurance Corp. (FDIC)-supervised financial institutions to a proposal that would shorten the standard settlement cycle from three to two days for securities purchased or sold has been issued by the deposit insurer.
Last week, the FDIC (in issuing a joint notice of proposed rulemaking with the Office of the Comptroller of the Currency) asserted that the proposal is consistent with an industry-wide transition to a two-business-day settlement cycle. The agencies said the shorter cycle (cut down by one day) “is designed to reduce settlement exposure and align settlement practices across all market participants.”
Under existing rules, national banks generally may not effect or enter into a contract for the purchase or sale of a security that provides for payment of funds and delivery of securities later than the third business day after the date of the contract, unless otherwise expressly agreed to by the parties at the time of the transaction, the OCC/FDIC notice stated. The practice is known as “T+3”—shorthand for “trade date plus three days.”
The Financial Institution Letter (FIL) issued by the FDIC Tuesday (FIL-44-2017) noted specifically:
- The notice of proposed rulemaking would amend Section 344.7 of the FDIC’s Rules and Regulations and the corresponding OCC regulations by shortening the settlement cycle from three days to two (i.e., a “T+2” settlement cycle).
- Under Section 344.7, an FDIC-supervised institution generally may not effect or enter into a contract for the purchase or sale of a security that provides for payment of funds and delivery of securities later than the third business day after the date of the contract, unless otherwise expressly agreed to by the parties at the time of the transaction. The OCC’s regulations contain similar provisions applicable to national banks and federal savings associations.
- The three-day settlement cycle, which is the current standard for the U.S. securities industry, is referred to as “T+3” or “trade date plus three days.”
- The NPR is part of an industry-wide shift to a T+2 settlement cycle, including through compliance with the SEC’s T+2 rule.
- The NPR will be published in the Federal Register with a 30-day comment period.
- FIL-32-2017 Securities and Exchange Commission Rule Amendment to Shorten the Trade Settlement Cycle issued July 26, 2017 advises FDIC-supervised institutions of the industry’s change to T+2 settlement standards by September 5, 2017.
- For many FDIC-supervised institutions, the majority of the changes needed to implement T+2 will be completed by third party industry custodians, systems and service providers, broker-dealers through which institutions trade for themselves or on behalf of their fiduciary and custody accounts, and broker-dealers providing retail securities brokerage services to institution customers.